Natural Gas Futures Drop as Milder Weather Cuts Fuel Demand

By Naureen S. Malik -
Apr 1, 2013

Natural gas futures declined in New
York for a second day on expectations that demand for heating
fuels will ease with milder U.S. weather.

Gas slipped 0.2 percent after MDA Weather Services in
Gaithersburg, Maryland, predicted that an eastern cold shot this
week will give way to above-normal temperatures from April 6
through April 15. Prices pared an earlier loss of 2.4 percent on
the outlook that stockpiles probably fell by 65 billion cubic
feet last week, bucking the historic norm of an increase for the
period, said Dominick Chirichella, senior partner at the Energy
Management Institute in New York.

“You have weak temperature forecasts and you have what is
going to be a very bullish inventory number this week; one is
offsetting the other,” Chirichella said. “The arrival of warm
weather is going to check the rally here a little bit unless we
get some really, really hot temperatures.”

Natural gas for May delivery fell 0.9 cent to settle at
$4.015 per million British thermal units on the New York
Mercantile Exchange. Trading volume was 0.3 percent below the
100-day average at 2:46 p.m. The futures have gained 20 percent
this year.

The discount of May contracts to October, a measure of
expectations for summer demand, widened 1.4 cents to 11.8 cents
per million Btu.

May $3.75 puts were the most active gas options in
electronic trading. They fell 0.3 cent to 2.6 cents per million
Btu on volume of 970 contracts as of 3:53 p.m. Puts accounted
for 49 percent of options volume.

Options Volatility

Implied volatility for at-the-money gas options expiring in
May was 29.55 percent at 3:35 p.m., up from 28.89 percent on
March 28. June options volatility was 27.91, down from 28.11
percent.

The high temperature in Chicago on April 10 may be 64
degrees Fahrenheit (18 Celsius), 8 above normal, and New York
City may see readings 7 degrees higher than average at 67,
according to MDA in Gaithersburg, Maryland. Houston’s high may
reach 81 degrees, 7 above normal.

Gas demand typically slumps between the peak heating-demand
season and before hot weather drives power demand to run air
conditioners.

Inventories totaled 1.781 trillion cubic feet in the week
ended March 22, widening a year-over-year deficit to 26.5
percent, the most in Energy Information Administration data
going back to 2005. Supplies reached a record year-on-year
surplus on March 30, 2012, after a mild winter crimped demand
while production surged to an all-time high.

Inventory Decline

Gene McGillian, an analyst and broker at Tradition Energy
in Stamford, Connecticut, said his preliminary estimate for a
storage decline in the week ended March 29 is 90 billion cubic
feet. He said he’ll issue a final estimate on April 3.

“We’re getting early expectations for a sizable withdrawal
from storage, and that could keep the market a little firm,”
McGillian said.

The five-year average storage change for last week is a
gain of 4 billion cubic feet, according to the EIA. Stockpiles a
year earlier climbed 43 billion.

Gas production in the lower 48 states fell in January to
the lowest level since March 2012 as gas-plant maintenance and
frigid weather hampered output, the EIA said in its monthly EIA-
914 report released March 29. Output declined 0.9 percent to
72.1 billion cubic feet a day from a revised 72.77 billion in
December.

CFTC Data

Money managers boosted net-long positions, or wagers on
higher prices, on four U.S. natural gas contracts advanced by
65,758 futures equivalents, or 20 percent, to 387,686 in the
week ended March 26, a record in data going back to January
2010, according to the Commodity Futures Trading Commission’s
March 29 Commitments of Traders report.

The measure includes an index of four contracts adjusted to
futures equivalents: Nymex natural gas futures, Nymex Henry Hub
Swap Futures, Nymex ClearPort Henry Hub Penultimate Swaps and
the ICE Futures U.S. Henry Hub contract. Henry Hub, in Erath,
Louisiana, is the delivery point for Nymex futures, a benchmark
price for the fuel.

Nymex gas open interest rose to an all-time high of
1,437,134 contracts on March 28, data from the exchange show. It
has set a record on every trading day since March 15.

The exchange has a one-business-day delay in reporting full
open-interest data.